Innovative Business Ideas

Reinventing in disruptive environments

23 February 2016

Disruption

Human Capital Alliance senior advisor K I Woo tells why businesses must continuously reinvent themselves.

In today’s highly turbulent disruptive business environments, companies must continuously reinvent themselves to be sustainable.

Mark Bertolini, Aetna Insurance Company’s CEO, David Duncan and Andrew Waldeck Innosight partners said in their recent Harvard Business article that companies must identify key marketplace “fault lines”.

“No business survives over the long term without reinventing itself, but knowing when it is time to transform is difficult.”

Knowing when to change

Knowing when it is time to transform, the authors said can be even more difficult. Several interrelated “fault lines” usually indicate that the ground beneath a company is unstable. These fault lines focus on several key fundamentals questions: whether the business serves the right customers, uses the right performance metrics, is properly positioned in its industry and deploys the right business model.

Fault lines

1. Is business model aimed at right customers?

For most of 160 years, Aetna serviced mainly large corporations, government, universities and other employers. “Typically, one person or small department chose health plans for entire organization” Aetna’s core competency was selling to intermediaries rather than end consumers. Because managers and brokers were always trying to demonstrate value to their organizations, the business came to mean always offering something “new”. Few members used the new features in a given year but paid higher and higher premiums. These one-size fits all plans satisfied primary customers’ needs (benefits managers) but not the true end customers.

Switching to B2C emphasis:

Aetna immediately began develop new products and services directly targeted at end-user needs and began helping consumers make informed decision about health.  The business model’s primary purpose was to develop the right health plan for situations and hospitals, clinics and providers and most of all provide higher quality lower-cost cares.

Questions asked:

1. What are each group’s unmet needs? Do they vary across different customer types?
2. Can new competitors seized opportunities from potential customers we are servicing?
3. Are customers loyal to our product or captive because of lack of options and would they defect if they could?
4. If we are a B2B company, do business customers needs conflict with those of end consumers?
5. Could emerging technologies simply change how end users needs are met?

2. Performance metrics

When industries reach inflection points old metrics are often deceptive and sometimes dangerous. Once reliable measurements, may often lead to sharp declines or even failures, even though short term results may be healthy. For instance, health benefits managers may want the largest physician and hospital networks possible within a cost range and minimum complaints. Aetna began measuring three factors that were most valuable to future customers:

1. Improving care experience
2. Improving populations’ health
3. Reducing costs

New focus:

Aetna’s old business model focused on acquiring new customers, building the customer base and lower risk exposures. After considering the following questions, its new model focused on retaining existing customers.

1. Do we understand what our customers really value? How well does our production performance or service match customers definitions of value?
2. Will customer of tomorrow define quality differently from today’s customers?
3. How closely do customer satisfaction and financial metrics correlate? Are customers’ satisfaction scores as strong as our financial indicators?
4. Are we measuring units and volumes rather than outcomes? If outcomes, are we measuring ones that matter to customers, or ones that matter to us?
5. Do our products or services have more features or complexity than most or our customers’ value?
6. Is there a new metric that aligns with the needs of future customers?

3. Industry Position

Most companies start by serving niches, then branch out with more and more tasks. “If others are moving into your space at lower cost, it could signal another fault line. In other words, watch out for players beginning to do what you do.” The following questions should be considered:

1. Are regulatory, technological or other external developments lowering entry barriers or changing how customers use our products or services?
2. Are external forces diminishing the value of our role in the industry?
3. Is a disruptive technology emerging that could significantly change the cost-equation in a major part of industry?
4. Are our customers starting to bring our services inhouse or outsourcing to someone else?
5. Is our industry expanding to include layers new types of competitors? Is there consolidation among major players – signaling its harder to make money in traditional ways?

4. Business Model

For many industries, current business models may not serve well into the future. Even though its bottom line was healthy, Aetna realized that its business no longer served employers and consumers well. Its business model was based on setting policy rates to exceed claims and achieving profitability by keeping a tight lid on claims while premiums skyrocketed. It shifted from a B2B to B2C model, because it realized that consumers were already footing 40 per cent of health care costs.

These questions were explored:

1. Is at least one emerging competitors using a different business model that looks financially unattractive?
2. Is the way we make money aligned with how value is created for customers? Are customers balking at price increases or added fees?
3. How durable are key components of our existing business model – things like customer value proposition, resources and processes and profit formula? Any risk of being undercut by external forces or new competitors?
4. Will strategic assumptions underlying our existing model – assumptions about risk – hold true as our industry changes.

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